Apple earnings soar on sales of Macs, iPods

Low memory costs boost profitability, but company says it won't last

DanGallagher

SAN FRANCISCO (MarketWatch) -- Apple Inc. said Wednesday that earnings soared 88% in its second fiscal quarter thanks to booming sales of iPods as well as the company's line of Mac computers.

Lower component costs - mostly related to flash memory - also boosted profitability for the quarter. But the company warned investors not to plan on those margins going forward.

Still, the news excited investors, who sent Apple shares past Investors cheered the news, sending shares of Apple past the $100 mark in after-hours trading to a new all-time high, on a split-adjusted basis. The stock was last trading at $101.39 -- up more than 6% from the regular session close.

Shares of Apple
AAPL, -0.32%
have gained more than 40% over the last 12 months.

Another factor in the heavy trading was likely the company's defense of CEO Steve Jobs in a growing controversy over the backdating of stock options in early 2001.

Earnings blow away Wall Street's estimates

The Cupertino, Calif.-based maker of consumer electronics products said earnings for the quarter came in at $770 million, or 87 cents a share, compared to earnings of $410 million, or 47 cents a share, for the same period last year.

Sales for the quarter grew more than 20% to hit $5.26 billion for the period ended March 31.

Analysts were expecting earnings of 64 cents a share on revenue of $5.17 billion for the quarter, according to estimates from Thomson Financial.

During the quarter, the company said it shipped more than 10.5 million iPods, its popular digital music player. More than 1.5 million units of its Macintosh computer line were also shipped during the period.

The company's profitability improved significantly during the quarter. Gross margin for the period came in at 35.1% compared to 29.8% in the year-ago period.

High profit margins unsustainable

Much of the boost to margins came from "very favorable" pricing for components - memory in particular. However, Apple executives warned analysts in a conference call that the high margins are not sustainable, as the supply situation in the memory market becomes more balanced.

"This quarter, we see some commodities moving from an oversupply condition to more of a supply-demand balance position. Particularly NAND flash and memory in general," one executive said during the call.

Apple says margins of 27-28% are more realistic going forward.

That may be why the company issued a rather tight forecast for the current period. The company expects revenue of about $5.1 billion with earnings of 66 cents per share for the period.

Analysts were expecting revenue of $5.45 billion with earnings of 67 cents a share.

Another factor that may affect future reported earnings is the accounting method that will be used for the highly-anticipated iPhone - set for release in late June.

The company plans to account for the product using a subscription model, because it plans to offer software updates for the device. This means revenue for the iPhone will be recognized over a 24-month period, which is not expected to impact the company's cash flow.

Apple board defends Jobs

In a separate statement Wednesday, the defended CEO Steve Jobs against allegations by former CFO Fred Anderson that he was involved in the illegal backdating of stock options in early 2001.

Anderson reached a settlement Tuesday over backdating charges by the Securities and Exchange Commission. Anderson says he warned Jobs about the dates on options grants in late January 2001. Another former executive was charged Tuesday with backdating the options. See full story.

"We are not going to enter into a public debate with Fred Anderson or his lawyer," read the statement from Apple's board. "The SEC investigated the matter thoroughly and its complaint speaks for itself, in terms of what it says, what it does not say, who it charges, and who it does not charge."

The statement added that the board has "complete confidence in the conclusions of Apple's independent investigation, and in Steve's integrity and his ability to lead Apple."

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